I have rental home insurance plus supplemental STR insurance, but I have no idea how to handle this since my management doesn't have any idea about the incident.

He is asking for insurance information to make a claim and also to return back the deposit and rent.I want to know what is the risk involved here, if he can sue based on this incident and if I choose to return his deposit and rent, can I create a formal document to make sure he doesn't sue or ask for insurance information again.

If they accept this reduced rent rate not only do you start collecting some sort of income again which will help pay for the repairs, but it also severely limits any future lawsuits they might claim against you because they have already accepted compensation for the incident. 

I have been up for 3 months with ZERO complaints or incidents.

On the 6th day since incident, a restoration company (Owner - myself present) assessed the water damage and advised  moisture still present in ceiling cavity and it cannot dry by itself.

@Pam Ryan, I always write up an incident report and have them sign and take photos.

My best interest was making sure my tenant was fine, eviction never crossed my mind for Something like a sudden incident.

Other neighbors are also shocked and surprised about this incident.

We had used them previously without incident so who would have thought they would flake out. 

Up to you, but if this is the first incident, no.